The Reasoned Review

Bloomberg reports that Ireland banks need a $43 billion dollar bailout due to “appalling” lending practices, using the same Wall Street “financial innovations” that got Greece into so much trouble:

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

Greece wasn’t the first European country to go under, and it sure as hell wont’ be the last. After Ireland goes, Italy, Portugal, Spain, or even “Great” Britain are all worthy candidates for the next European collapse.

The Times gets credit for scooping the new plans for Germany and France to help Greece after all. I guess all those big bad threats to leave Greece to the mercy of the IMF weren’t really serious.

In one sense, it really doesn’t matter whether Germany or the IMF ends up on the hook for Greece’s bailout (which is supposed to cost 22 billion Euros, or something like $38 billion). The point is that Greece is not going to be the last country who needs this kind of assistance. As I mentioned previously, Britain, France, Portugal, Ireland, Belgium, Italy, and Spain all have debt crises looming on the horizon. Whoever cleans up after Greece will likely end up mopping up all of Europe. So it’s natural that neither Germany or the IMF want to set the precedent alone.

Again, I cannot stress Wall Street’s complicity in this affair. They were the ones selling Greece absurd amounts of debt on one hand and then buying credit default swaps against that debt on the other. That’s bandit behavior, and they shouldn’t be allowed to walk away from this colossal imbroglio they created without any repercussions. I think it’s clear that Wall Street deserves to pay for some of this mess, if not all of it.

But herein lies the paradox! If Wall Street pays up to bail out Greece, it’s really the US doing it, since all five of the major bank-holding companies are still on TARP life support. So it’s really a no-win situation, unless you happen to be a major bank-holding company on government life support. Then you win.

Well, I certainly didn’t expect this. It looks as though Germany is going to rely on the IMF to bail Greece out should the dreaded moment arrive (hint: it will). This does not bode well for the European Union, and indeed, until now, many thought the only way to preserve the integrity of the Euro would be to treat this Greek crisis as an in-house affair. Resorting to IMF loans would do very little to assure investors that the EU is good for its members’ debt, as this basically signals to the rest of the world that Germany (virtually the only healthy economy left in the EU) is either unwilling or unable to shoulder the entire partnership’s burden.

Remember: France, Britain, Spain, Italy, Portugal, Ireland, and Belgium are all facing debt crises of their own, many just as deep, though not as visible, as that of Greece. Germany’s indication that it will not help Greece is effectively a pre-emptive warning to the rest of these countries that when their own respective economies collapse, not to come banging on Germany’s door. Bloomberg reports today that Greece’s Prime Minister has set a deadline for Germany to bail it out, before it goes to the IMF for help. Germany has already indicated that it’s going to let the IMF solve Greece’s problem, effectively rendering that threat moot.

This is big news for several reasons. With Germany, the last healthy EU economy, refusing to bail Greece out, we may be seeing the end of the European Union as a cohesive economic entity. The Euro has been taking a beating ever since fears of a Greek default arose (it’s down more than 10% since this crisis began), and it’s sure to drop further on today’s news. It is unlikely that Greece will default or be forced out of the economic partnership, but if the IMF gets its fingers into Greece, it will only be a matter of time before the rest of the EU comes to the IMF, arms outstretched. Greece will not be the last European country to undergo a debt crisis, as I hope I have shown.

If Greece accepts IMF help, it will be forced into far worse “austerity measures” than anything Germany would have imposed. “Austerity” is generally a euphemism for cutting off social services and indiscriminately firing middle class workers while the rich make off like bandits. Already these measures have caused massive riots and general strikes in Greece, and these are sure to continue if the IMF gets its way.

As always, one can draw a straight line between economic collapse and Wall Street. Many sources have already reported on how Wall Street helped Greece hide its debt for years, and, in fact, encouraged them to take on more debt via “securitized” trades.

But that isn’t all. Wall Street’s “innovative financial instruments” – its Collateralized Debt Obligations and other over-the-counter derivatives – proliferated throughout the European economy, and are at the heart of the myriad debt crises. They made billions selling Europe these worthless junk bonds, and now they’re slowly walking away, whistling, as though they had nothing to do with it. Greece should be demanding massive reparations for the unprecedented fraud of which they, and the rest of the EU, were the victims.

It’s difficult to see where this will end. The IMF bails out Greece instead of Germany – but then what? Portugal, Italy, Spain… then France? What if Britain needs a bailout? Does the IMF have such resources? Are they just going to print the money? Does anyone know what they’re doing?

The Independent has a good rundown of some recently released documents pertaining to the Lehman Bros. debacle in September ’08:

The failed investment bank [Lehman Bros.] approached a London law firm over plans to use a controversial accounting trick – known internally as “Repo 105″ – to temporarily conceal the liabilities.

…

The bank used the Repo 105 tactic in the run-up to the end of its three-month financial reporting periods to help cushion the blow of huge losses in the first half of 2008 and suggest its financial health was far more robust than it was.

Linklaters – which drafted a document which stated that the technique was legal under UK law – was only approached after Lehman was unable to find an American law firm to say that the Repo 105 transactions could be carried out in the US.

…

The bank had become so addicted to using the technique that when executive Bart McDade, who went on to become Lehman’s chief operating officer, was asked if he was aware of the device the report cited he wrote in an April 2008 e-mail: “I am very aware … it is another drug we r [sic] on.”

I don’t know how many of these scandals have to emerge before we realize that financial institutions (and, likely, corporations in general) are not scrupulous organizations, and they are willing to dispense with any ethical norm a) so long a they’re allowed to, and b) so long as it’s profitable.

It’s astounding that we haven’t done a single thing to prevent our banks’ future malfeasance. Their size hasn’t been restricted (indeed, they’ve grown since the crisis), OTC derivatives are still legal, most of the same executives are in place – its a ticking time bomb.

The Times has a pretty strong piece in today’s issue about Britain’s massive debt problems. Yet more evidence that the “Greek Problem” isn’t limited to Greece alone. The whole European Union and most of its satellite economies are probably in for a rough decade:

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

“It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.”

Now, unlike the United States, other countries’ deficits actually mean something. They aren’t allowed to go around printing as much money as they want, running absurd amounts of debt, and forcing everyone to except their currency at the barrel of a gun. Running budget-busting deficits isn’t just something they can laugh off, like we can here in America – over a long enough time scale, those deficits can make a country’s currency worthless.

It’s tough to see where this will end. The whole EU and attached economies are vulnerable to this “contagion”, which, I cannot stress enough, has a lot to do with Wall Street’s reckless bets during the aughts. If we were living in a fair world, these Wall Street firms would pay reparations to the affected countries for essentially destroying their economies. As it is, it looks as though we’re going to have to watch the EU go down in flames before anyone does anything.

Then, likely, we’ll see some backdoor deals, a few hurried conferences, and the US Government will come out with a new TARP program, this time for Europe. Washington has always had a flair for publicity – maybe they’ll call it a “second Marshall Plan”. It’s inconceivable that the US would allow its most favored “allies” to go down without assistance. And such a move would likely have incidental benefits – namely, bringing the EU firmly under our political control.

Sure, the American taxpayer will eventually have to foot the bill, but who ever cared about that?

The Economist takes a coldly “rational” stance with its editorial exhorting Germany to “Let the Greeks Ruin Themselves“:

A bail-out, Mrs Merkel fears, would break the bargain Germany struck in accepting the euro: that the single currency’s members would never jeopardise its stability nor ask Germans to pay for anyone else’s mismanagement. That said, the currency union was hardly an act of martyrdom by Germany. In the past decade its firms have modernised and their workers have accepted miserly pay rises, boosting their competitiveness. In a euro-less Europe, its trading partners could have erased some of that advantage by devaluing their currencies. Instead, many of Europe’s weaker economies failed to reform and Germany accumulated gratifyingly large current-account surpluses. Nor has the crisis been entirely bad news. The euro has weakened by about 10% against the dollar since the beginning of 2010. Under the circumstances, that was not a harbinger of inflation but a welcome tonic for European exports—especially German ones.

I agree: it shouldn’t be Germany’s responsibility to bail out the “profligate” Greeks from their manufactured crisis. But, again, I want to stress that American banks were a driving factor (some might say a decisive factor) in allowing Greece’s budget to get so out of hand.

We need a systemic way of dealing with these European Union crises, because I guarantee you Greece won’t be the last. Spain, Portugal, Italy, Ireland, and even France are all in danger of being declared insolvent next. The only way we can get this straight is a meaningful audit of our major US banks, along with court-mandated payments to these European countries that suffered from their malfeasance. It’s absolutely criminal that they should get to profit from taking down whole countries.

As far as The Economist’s editorial is concerned, sure – let Greece collapse. Just so long as you know that decision will likely doom the previously mentioned countries at risk. We don’t want a Lehman Bros scenario where Greece is denied emergency funds, but once Spain starts to collapse they immediately get a bailout. That wouldn’t be fair. Letting Greece “ruin itself” means letting a raft of European countries ruin themselves. And they’re not even ruining themselves so much as they were ruined by the American banks.

The Wall Street Journal reports today that Greece will get a $41 Billion “financing” package from Germany and France, who, I hasten to point out, aren’t exactly swimming in liquidity themselves.

The plan seems to be that Germany and France will soak up some of this Greek debt via public markets and state-owned banks, due to a EU bylaw that prohibits member states from owning the debt of other members. What’s astounding to me is that no one is asking Wall Street to pony up any of this cash. They, after all, are almost entirely responsible for this Greek debt crisis, and they made hundreds of millions of dollars watching Greece go down in flames.

Goldman Sachs alone, who was arguably the single biggest catalyst for Greece’s downward spiral, paid out more than $21 Billion in sheer bonuses to its employees. AIG, another  major player in this, paid out more than $100 million. I mean, shouldn’t some of this money go toward cleaning up the mess they caused? The Times printed an excellent series of articles on Wall Street’s complicity in this just one week ago.

Javier Hernandez  even reported that major bank shares swung upward on rumors of a pending EU Bailout to Greece. So they’re blatantly profiting from their crimes. I mean, how is this legal?

Oh yeah, I keep forgetting. The banks own Congress. They make the laws.

Bloomberg has a good article today about how our favorite Fed Chief, Mr. Bernanke, is trying to allay calls for a Fed audit by offering more “transparency”. Let’s see what he has in mind:

The Fed will support legislation to let government auditors probe six temporary programs created to combat the financial crisis such as the Primary Dealer Credit Facility, Bernanke said yesterday in House testimony. While he would support the delayed release of names of firms getting aid from those programs, he said banks borrowing through the longstanding discount window must be allowed to remain anonymous.

Bernanke’s move toward greater openness may not dissuade lawmakers who want the Fed to disclose more information about the Fed’s lending and policy decisions. Lawmakers are responding to public anger over the Fed’s role in the $182.3 billion bailout of American International Group Inc.

…

“He is definitely trying to defuse the Ron Paul issue,” said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., which oversees $37.4 billion in assets. “The best he can do at the moment is to play more offense than defense.”

Does he really expect us to buy this bullshit? If that’s what he calls “transparency”, I’ve got some water from the Ganges to sell him. The whole point of this Fed audit is to see what they did with the money we don’t know about. Specifically, we’d like to know about money that was lent under the table to the European union to prevent it from collapsing. And George Washington, over at ZeroHedge, tips us off to $12 Billion in Federal Reserve dollars (cash money, yo) that mysteriously went to Iraq during 2003-2004. Whom did they send it to? Why? These are the questions an audit is supposed to answer.

Releasing hand-picked data from 6 controversial Fed programs tells us nothing. The flimsy excuse Bernanke gives us for why he shouldn’t be audited is that it would have a “bad effect on markets”, and give the impression that Fed policy is subject to “political pressure”. Hey, idiot! I think that “impression” has already been effectively created. You remember reducing the benchmark lending rate to zero, and then keeping it that way for two years? Yeah, that was pretty much political. And what were the bailouts, then? Oh, yeah, political. Man, this is such a convenient excuse – any time someone suggests oversight, all you have to do is say the word “political” and poof! Oversight vanishes.

The Fed needs a full, meaningful audit if we’re going to get any semblance of economic balance back. These days of unlimited money must end.

The Times continues its reporting on the Greek crisis:

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Fabulous. So let me see if I have this straight: our banks sold Greece predatory loans which they knew Greece would never be able to repay – then they took out “insurance” on those loans, effectively betting against Greece’s solvency. Heads they win; tails Greece loses. It’s important to note that this is the exact same behavior they indulged in during the sub-prime fiasco. They sold loans to people whom they knew would never be able to pay them back, and then bet that those loans would default. If, by some miracle, the debtor was able to pay these banks back, they’d get a nice interest rate. If, as the banks bet, the debtor couldn’t pay them back, they’d get re-imbursed via the Credit Default Swaps. It’s a classic win-win for the banks – and a lose-lose for whatever poor sucker they entrapped.

Only now its happening on the level of entire countries. I want to stress that Greece is neither the first nor the last nation to default on account of the malfeasance of US banks. Iceland came before it, and Spain, Ireland, or even France are likely to come afterward.

It is clear that our banks are purely malevolent forces, who benefit only from the destruction of others, and that, for the sake of the world economy, they must be thoroughly audited and broken up. And it is equally clear that this will never happen.

The Times has a pretty good rundown on Wall Street’s complicity in Greece’s current budget woes. The European Union has rather strict rules on the size of the deficit its member countries are allowed to have; but Greece, it turns out, has been under-reporting its deficit for nearly a decade. I wonder where they learned to cook their books?

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Oh.

We’re going to hear a lot in the coming weeks about Greece’s irresponsibility and how Wall Street callously enabled them like a heroin dealer that profits from a junkie’s weakness. And while these accusations are no doubt true, they miss the real point of the Greek debt story, which has to do with the paradox on which the European Union is founded. In fact, a crisis like this was bound to happen. Greece’s and Wall Street’s malfeasance are inexcusable, and certainly no one should try to absolve them from blame on this, but we have to ask ourselves: how long did Europe expect this partnership to last?

At the heart of the EU’s troubles lie the fundamental disparities between its member economies. Germany, as we all know, is an economic powerhouse, and produces the lion’s share of the EU’s GDP. France does well for itself, as do Austria, Sweden, Switzerland and a host of other countries. But the countries that aren’t doing so well: Greece, yes, but also Italy, Portugal, Ireland, and Spain are all  in a difficult and ultimately insoluble position.

Their economic fortunes entwined with that of the rest of Europe, they find themselves under enormous pressure to report spectacular economic growth. If unable to do so, their troubles extend to the other member countries, and, most importantly, cast aspersions upon the value of their shared currency – the Euro. So the incentive to fudge the numbers is tremendous.

The paradox of “Eurozone” (zone of countries that use the Euro) directly stems from this. Put simply, no country can leave the Eurozone after it joins, and at the same time, every Eurozone member has to post annual growth without fail. The Greek situation is a perfect illustration of this, but the point is that it could have happened (in fact, probably will happen) to several EU countries. Greece just happened to be the scapegoat because it had the biggest debt.

This handy chart from Der Spiegel should nicely demonstrate this point.

Even Germany and France, the so-called “EU powerhouses”, are technically breaking their own debt rules. But why doesn’t Greece just divest itself from the Euro, say it was too hasty in joining, and maybe re-apply for admission in a few years once it gets its economy under control? Well, it could do this  – and likely would, if France and Germany had their say – but such a move would precipitate a run on Greece’s banks, sink its economy, and leave it a European pariah for at least a generation. Think about it: if you had a bank account in a Greek bank in Euros, and the Greek Premier announces one day that your account will be transformed into Greek Drachmas on such-and-such a date, what would you do? Obviously you would liquidate your holdings and invest in some more stable Eurozone country. Germany, perhaps?

But at the same time, Greece’s economic situation is causing near-panic among investors and ravaging the Euro. The Euro’s value has dropped more than 9% in just two months. And therein lies the paradox. By staying in the Eurozone, Greece threatens the whole enterprise. By leaving, it dooms itself to economic collapse.

A recent interview with the EU Central Bank chief economist Jurgen Stark displays the confusion now embroiling the EU. It’s clear that no one knows what to do about this. For the time being, I suppose, Germany or France will have to pony up the cash to bail Greece out, but this does nothing but delay the central problem described above.

Greece is in a lot of trouble, and as a member of the “eurozone”, its troubles have now become Europe’s. In a sense, we’re getting a grim preview of the sort of future we might have in America with the case of Greece. Like us, Greece spent heavily over the past decade and accumulated a lot of “sovereign debt”. Unlike us, however, Greece is not a military bully – and thus cannot simply print money and force the rest of the world to accept it. Further complicating the issue is Greece’s membership in the European Union. No Euro-using country has ever declared bankruptcy, and analysts are busy falling over themselves to predict what a Greek government default would imply. Some of the most grim predictions entail the break-up of the EU, while the more moderate voices still predict havoc within the eurozone.

If Greece defaults, it seems likely there would be some sort of run on the European banking system, and almost certainly the Greek banking system. But more significantly, this crisis highlights the impossibility of leaving the Eurozone, once you become a full-fledged member. For many countries (notably, the PIIGS – Portugal, Italy, Ireland, Greece and Spain – the slowly growing Eurozone countries) this leads to a catch-22.

One one hand, adopting the Euro means a country can’t combat deflation via the traditional methods. Usually this would be done by revaulating its currency, but since no individual country has control over the Euro (well, maybe Germany does) – this ceases to be an option.

On the other hand, an announcement to leave the Euro (As Tyler notes) would trigger an immediate run on that country’s banks. Nobody wants their bank account in Euros to suddenly transform into a bank account in a less prestigious currency (lira, drachmas, etc.) Once a country gets into the EU, it pretty much has no choice but to stay.

So leaving the Eurozone would doom Greece – and staying in might doom the rest of the EU. What are they doing about it? Well, the Times splashed on its front page today that after weeks of nail-biting vacillation, the EU has finally pledged a “bailout” to Greece. (Under that article, in tiny letters, the headline: “Greek Civil Servants Strike Over Austerity Measures – giving us a taste, I guess, of what that bailout will cost.) But the point is that no one knows how this bailout will actually work.

At the root of Greece’s problems, and the EU’s, lies the vast difference in economic output between members. Though Greece and Germany use the same currency, their economies are vastly different. This naturally leads to over-valuation of the Greek economy, and, I suppose, under-valuation of the German economy.

It looks like Britain made a smart move after all, not adopting the Euro.

The Copenhagen Climate Conference kicked off today with a secret memo circulating amongst the ‘rich’ participants. Originating with the US and UK, the memo details a significant departure from the Kyoto Framework. If its recommendations are enacted, rich countries will no longer be obliged to reduce their carbon emissions in proportion to poor countries – indeed, they would be permitted to continue emitting more than twice the carbon of the “developing world” all the way to 2050. This is truly a scandal.

From The Guardian:

A confidential analysis of the text by developing countries also seen by the Guardian shows deep unease over details of the text. In particular, it is understood to:

• Force developing countries to agree to specific emission cuts and measures that were not part of the original UN agreement;

• Divide poor countries further by creating a new category of developing countries called “the most vulnerable”;

• Weaken the UN’s role in handling climate finance;

• Not allow poor countries to emit more than 1.44 tonnes of carbon per person by 2050, while allowing rich countries to emit 2.67 tonnes.

This development cannot be seen as anything less than an attempt by the “developed” world to renege on its Kyoto obligations. Working together, these rich polluters have much more “negotiating power” than their poor counterparts, and will likely be in a position to dictate terms.

One diplomat says:

“It is being done in secret. Clearly the intention is to get [Barack] Obama and the leaders of other rich countries to muscle it through when they arrive next week. It effectively is the end of the UN process,” said one diplomat, who asked to remain nameless.

Such talk smacks of neocolonialism, of utter disregard for the United Nations or international law. Ideas of “carbon exchanges” and “cap-and-trade” are meaningless if the rich still get to pollute twice as much as the poor. This memo is evidence of implicit bad-faith on the part of the 20th century colonists, and I’m not sure if the conference will be able to regain its credibility.

Here we have yet more proof that the Europeans, whom we once deigned to lecture on the “virtues of democracy”, have long since surpassed us in that.

From Der Spiegel:

Labor Minister Franz Josef Jung resigned from Angela Merkel’s cabinet on Friday. In a brief statement Jung said he was taking “political responsibility” for having misinformed the German public due to, he claims, a lack of knowledge regarding civilian casualties stemming from a Sept. 4 airstrike Afghanistan.

You see, in Germany, when politicians are caught blatantly lying to their constituencies, they do the right thing and step down. The amazing aspect of this is that, by American standards, Josef Jung’s transgression was exceedingly minor – he merely lied about the effects of one airstrike in Afghanistan. Following the strike, Jung claimed that there were no “civilian casualties”, but later it came to light that there were tens or hundreds, many of them children. For that he resigned.

Now can you even imagine something like that happening in America? We have grown so desensitized to the constant stream of mendacity from our leaders that it is difficult to grow angry over any one lie. Warrantless  wiretapping, “We Do Not Torture”, Weapons of Mass Destruction, “existential threats”, secret detentions, the Saddam-Al Qaeda link, and the list goes on and on and on. Yet not only do our leaders routinely inform us that no investigations into these lies will be forthcoming, no popular outrage seems to exist over them.

And Jung isn’t the only one to have been let go:

The debacle has made things difficult for Germany’s new Defense Minister Karl-Theodor zu Guttenberg. He is reported to have “exploded” when he first learned of the report — when he was contacted by Bild on Wednesday for a comment. He immediately called in the General Inspector Schneidhan to see if he was aware of the report. Once it was clear that he had known about it, there was little choice but for him to resign. Peter Wichert, the deputy defense minister, was also fired.

We in America are a long way off from that kind of democracy.